The Conventional Pay-Down Plan

Many investors use debt to acquire additional properties with the intention of selling them long before they are paid off. They simply use leverage as a way to acquire properties, make some rental income off of them, and then resell them for a profit. Other investors takes a longer-term approach where the ultimate goal is to hold properties for maximum income after the last mortgage payment has been paid.

The problem with the “buy and hold” strategy is that even the most patient investors don’t want to wait 30 years to pay off a mortgage. To combat this, some investors will sign up for a 20 or 15-year mortgage, forcing them to make high payments. If your property still cash flows with the higher payments, this can be an effective strategy. The downside is if your personal or rental income ever drops, those high mortgage payments can suddenly become a burden, perhaps forcing you to sell early.

A safer technique is to lock in a thirty-year conventional mortgage and do whatever you can to minimize your monthly payments. A low monthly payment will mean a better return, at least on paper. You can then structure the mortgage payments to maximize the amount of money going toward the principal. By opting to pay more on your mortgage every month, every dollar above the required minimum payment goes directly to the principal. You also have the option of adjusting what you pay, depending on your situation at the time.

For example, if you have a loan for $130,000 and are fortunate enough to have an interest rate of 4.25%, your mortgage payment (principal and interest) will be $639 a month. If you are getting $1400 a month in rent for the property, you are netting $761 a month before expenses. If you don’t need the income elsewhere, consider bumping up your mortgage payment. Adding just $200 a month (to $839), can save $41,000 in interest and cut over eleven years off the length of your mortgage.

In the above scenario, adding $500 a month to the principal will save you $63,400 in interest and cut 17 years, nine months off the thirty-year loan. You will own the property in a little over thirteen years. If, for whatever reason, you need to redirect that rental income, you can always scale the principal payments back down. Remember, you can go up from the minimum payment set by the bank; you just can’t go any lower. So, start low and move up as you feel comfortable.

If you are able to direct $1000 a month toward that $130,000 loan, you may be losing money on the property, but you will pay off that loan in less than eight years, saving just over $100,000 in interest. Once you have paid off a home, it becomes a fully owned asset and a constant income stream. You can take the income, or funnel it towards paying down the mortgage on another property, continuing the “conventional pay-down plan.”